VHeadline guest commentarist Andrew McKillop writes: While the host of always-worse killer numbers on the US banking, finance and economic meltdown cannot fail to impress – leading to the growing likelihood that Obama's administration will simply have to nationalize the entire banking sector before it falls apart -- Russia's financial and economic meltdown is also impressive.
Unlike the USA, where the Obama team can and will print dollars, there is one missing ingredient for a nearly effortless return of the Putin-Medvedev regime to their previous icon status for Russia's fragile crop of 'new middle class' consumers, absolutely prepared to trade Western-style consumer trinkets for Western-style human or political rights.
By early February 2009 crowds in some Russian cities, specially inThe missing ingredient is a rebound in oil and gas prices, oil prices having taken the biggest part of the global economic recession shock, to date. Roughly 85% of Russia's export revenues come from oil, gas, and a mix of base metals and precious metals. All have suffered large, or massive price falls since midyear 2008 dealing a body blow to Russian GDP, the national budget and its huge deficit in 2009, and living standards for everyone. This includes the new middle classes who prefer to know about cell phones, and not know about torture cells or war crimes in Chechnya.
far-off Vladivostok and the East, now openly criticise Hero Putin and the increasingly police state antics of his power elite.
To be sure, 'wise investors' are rushing to sell out, liquidating their holdings and quitting the country: central bank and other estimates suggest about US$300 billion quit the country in the 3 months of Q4 2008. More headline grabbing to some, the Russian rouble has turned volte face, from a 'future world reserve money' according to some blithe spirit Russophiles in early 2008, to a money that can lose 7% or more of its value against the reference basket (mainly the US$ and Euro) in a single day.
One of those single-day 7% lessons in what happens in 2009 to the national moneySince August 2008, probably $250 billion of FX reserves, or 50% of the bank's early 2008 record total, has been spent trying to slow the devaluation rout of the rouble, at least 2 billion the single day Putin played rusty tunes from the Greenspan era to a polite but unbelieving crowd!
of a country depending nearly exclusively on oil and gas exports, was the day
Putin addressed the Davos Forum, to sternly announce his continuing and official
love affair with 1990s-style New Economics.
WHAT HAPPENS NEXT?
Countries like Saudi Arabia, or Qatar and Angola could be taken as able, or well able to sit things out atop their accumulated FX piles from oil and gas exporting, at least for a while. To be sure they will have to cut back a little, or a lot, on prestige projects like Ecological Cities at the desert's edge and increasing their oil pumping capacity, but they can sit things out.
In the case of Saudi Arabia oil watchers' folklore claims its rulers actually wanted the oil price crash of 1985-1986, followed by over 12 years of Cheap Oil, to 'reassert leadership' in world oil production, oil reserve depletion and oil reserve over-estimating. Today that is far from sure -- even Saudi rulers talk about "After Oil" investing, in big ticket soft energy gadget-filled Eco Cities, and "Stretching the Oil Age" by simply not increasing production or exports. This strategy, we can note, provides a nice alternative to admitting that further output expansion is geologically impossible.
Putin and Medvedev have a shorter shelf-life: they need to stretch their own power base and maintain good relations with many, shadowy, muscular domestic powerbrokers: Russia badly needs to find any way to increase its earnings from current levels, in at most 12 months. This could be shrunk by one-half, if we take the rate of 'cash burn' practiced by its central bank and economic ministries since around August 2008.
As noted above, approximately 50% of Russia's total FX reserves have already been burned out, as of early February 2009. The other half could go as fast, that is within 6 months – with one single possible result: a repeat of the 1998 default on its traded debt, often described by Putin as a shocking humiliation for Mother Russia, and more certainly of himself.
Related to GDP, Russia's international debt is surely less than the incredible accumulated private and public debt of the USA, about 360% of US annual GDP as of December 2008, but Russia has no easy way out through printing roubles, Obama-style.
Russia therefore needs oil prices to approximately double from current levels, that is to about $75 for WTI and Brent, with Urals grade close behind these markers. Curiously enough, Saudi rulers have since October-November 2008 politely let it be known that they, too, would like $75 oil.
Probably frustrating for Putin, however, his semi-traditional winter natural gas cut-off of Ukraine and down-the-line consumer countries, had almost zero impact on world gas prices, let alone oil prices!
- An oil supply cut-off, however, specially one that is somehow coordinated with Saudi Arabia and other OPEC, could have spectacular price-rising impacts.
The target cut for Russia is therefore around 2 Mbpd. Added to real world and actual OPEC export supply cuts, which are perhaps 2 Mbpd, a total close to 4.25 Mbpd reduction of world net total export supply would rather quickly damage stories of brimming tank farms in Cushing, OK, and copious over-ground reserves of crude and products, that oil contract short selling traders love to cite as their ticket to bet one-way.
Russia only needs one condition for success -- that Saudi rulers do not 'save the West' through hiking production, and alongside Putin will sagely wait for $75 oil to return.
DEVELOPING SOFT ENERGY
Like other oil, gas and coal exporters, ranging from Australia to Angola as well as OPEC states, Russia officially claims it is highly concerned about climate change, is unsure that its export supplies can be massively increased (although only pessimists could imagine they might fall), and is interested in Alternate & Renewable Energy (ARE) sources and systems, aka 'Cleantech'.
Any rational analysis of substituting say 25%- 40% of current global oil and gas supply with ARE in a period of 25 years, demanding at least 25 Mbpd oil equivalent energy supply from ARE and assuming rather large energy savings in the global economy, soon arrives at cost estimates well above $12,000 billion over 25 years.
- Put another way this is more than current total investment spending in world oil and gas, running at about $400 billion in 2007, but very certainly less in 2008-2009.
We can be rather certain that current play-acting with the Clean Development Mechanism as a marginal activity linked to European CO2 credits trading will never, and can never generate the massive funding needed for ARE development outside the OECD countries, which includes Russia.
An energy levy on world traded oil and gas supplies at prices that please exporters and importers find tolerable, at least, can be one way to finance ARE development outside the OECD countries. Here again Putin may find political interest, creating new alliances that defuse Russia's growing geopolitical standoff with Europe and the USA.
With time, common effort to develop the ARE on a worldwide basis could, or might help rebuild East-West confidence.
This can be hoped, but in the short-term Mother Russia needs a doubling of oil prices!
Andrew McKillop
xtran9@gmail.com
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